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38 Cards in this Set
- Front
- Back
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Why regulate? Monetary Policy Control
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Example: Reserve requirements for depositories
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Why regulate? Safety and Soundness
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-Restrictions on Assets, Equity and Activity
Diversification requirements Limits and/or restrictions on assets amounts held and/or characteristics Capital requirements -Restrictions on Entry and Competition Minimum entry requirements Restrictions on prices or expansion -Requirement for institutions to insure some of their activities |
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Why regulate? Information Disclosure, Monitoring and Enforcement
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Requirements for parties to disclose a specific set of information
Penalties for parties who do not disclose specific set of information |
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Why regulate? Sector/Consumer Protection
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Requirements to hold assets in specific economic sectors
Restrictions on what financial claims individual investors can have |
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Net Regulatory Burden
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Private costs of regulation less private benefits
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Regulatory Dialectic
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Describes struggle between financial intermediaries and regulators (cycle of regulation/deregulation)
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Federal Reserve Act – 1913
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Established Federal Reserve System
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McFadden Act – 1927
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States have authority over branching - de facto restricted bank expansion
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Banking Act 1933 (Glass-Steagall) and Banking Act 1935
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Limitation of banking activity to banks: separation of commercial and investment banking
Creation of deposit insurance (Federal Deposit Insurance Corporation) Imposition of interest ceilings on deposits (Regulation Q) |
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Securities Act of 1933 and Securities Exchange Act 1934
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Requirement to register new securities issues
Requirement to disclose truthful financial information on issuers Establishment of Securities and Exchange Commission (SEC) |
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Investment Company Act 1940
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Requirement to disclose financial statements and investments held
Mandatory description of investment companies objectives Determination of shareholders rights |
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Investment Advisors Act 1940
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Requirements for those selling investment advice to register with the SEC
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Bank Holding Company Act and Douglas Amendment 1956, Bank Holding Company Act Amendment 1970
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Establishment of control authority of bank holding companies to Federal Reserve
Limitation of out of state acquisitions of bank holding companies Limitation of acquisitions to banking related activities Definition of commercial bank: commercial loans + demand deposits Creation of non bank banks, such as Industrial Loan Corporations (Utah) Divest of commercial loans or demand deposits, not regulated as a bank 1987 (Competitive Equality Act-CEBA) put end to it, but grandfathered existing nonbanks |
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Depository Institution Deregulation and Monetary Control Act 1980
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Phase out of interest rate ceilings by 1986
Competition from Money Market accounts Revision of reserve requirements for depositories and increased deposit insurance |
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Garn St Germain Act 1982
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Allowed Money Market Deposit Accounts for banks (these are not Money Market accounts)
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Federal Deposit Insurance Corporation Improvement Act 1991
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Stricter enforcement regulations for depository institutions
Provision of additional funding for FDIC FDIC to manage insurance for commercial banks and savings institutions (BIF and SAIF) Creation of risk base insurance premiums |
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Interstate Banking and Branching Act 1994 (Riegle-Neal Act)
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Permission for banks to acquire and merge with out of state banks
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Financial Services Modernization (Gramm-Leach-Bliley Act) 1999
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Lifting of Glass Steagall Act restrictions
Permission for financial holding company to offer investment, insurance and banking activities |
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Sarbanes-Oxley Act 2002
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Requirement of CEOs and CFOs of public listed companies to certify financial statements and be responsible for internal controls and independence of auditing committee
Establishment of conflict of interest rules for equity research analysts Greater timely disclosure of material changes in financial/operations conditions by issuer |
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Basel II Accord 2006
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Establishment of new risk based capital requirements for very large international banks that include operational risk and allow internal risk based models for credit and operational risk
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Maturity intermediation
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borrow ST, lend LT (mismatching of assets and liabilities)
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National Currency Act 1863 and National Banking Act 1864
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Attempt to solve problems due to different currencies
Creation of the Office of the Comptroller of the Currency (OCC) which granted federal banking charters and authorized issue of national banknotes National banknotes to be printed in US mint and backed by holdings in US government bonds State banks still allowed to exist: dual banking system Issued checking accounts instead of banknotes Establish system of reserve requirements Allowed banks to hold required reserves as deposits in other banks, that is, created “pyramiding of reserves” Many banks ran out of reserves at the same time and called back loans Cycle of panics and recessions (i.e. 1907 was a bad year) |
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Office of the Comptroller of the Currency (OCC)
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granted federal banking charters and authorized issue of national banknotes (created 1863)
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1913 Federal Reserve Act - Creation of Federal Reserve System
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-Monetary authority to “control” money supply
-Lender of last resort Banks allowed to borrow at the discount window -Create an efficient payments system System to clear and process checks Electronic payment systems (1918 first one) -Create a bank supervision system All national banks under Federal Reserve System State banks can join voluntarily Over time increased power over other commercial banks and depositories, bank holding companies and some aspects of securities firms (margin requirements) even if not members |
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Federal Reserve Structure
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12 Regional banks, Board of Governors, Federal Open Market Committee (FOMC)
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Federal Open Market Committee (FOMC)
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7 members of Board plus 5 presidents of Federal Reserve banks
Fed NY permanent seat, others rotate Determine monetary policy |
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Fed Board of Governors
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Headquarters in Washington DC
Oversees the system and sets monetary policy Controls FOMC, explained below 7 members, governors appointed by president of US |
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Monetary Base
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Currency in circulation + Reserve deposits held within Fed
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Federal reserve has direct control over monetary base - 3 tools...
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Set reserve requirements
Discount window Open Market operations |
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Relationship between money supply and interest rates
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Money supply increases with lower (short term) interest rates
Money supply decreases with higher (short term) interest rates |
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Fed decreases reserve requirements
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Amount available for banks to lend out increases, Money supply increases and interest rates decrease
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Discount Window
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The mechanism in which banks can borrow reserve deposits from the Fed
Banks borrow from discount window and get more excess reserves Increase in reserves in the system -> increase in money supply If Fed lowers discount window rate, then money supply increases If Fed increases discount window, then money supply decreases |
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Open Market Operations
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Purchase and sale of government securities by the trading desk of the Federal Reserve Bank of New York
Trade securities with authorized dealers, i.e. large commercial banks or large securities firms Key: remember Fed can create currency by issuing notes |
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Fed purchases government securities from dealer
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Fed gets securities and dealer gets increased reserve account at Fed
Dealer can use excess reserves to make loans etc… Money supply increases and interest rates decrease |
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Fed sells government securities to dealer
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Fed delivers securities and dealers reserve account decreases at Fed
Dealer has lower excess reserves Money supply decreases and interest rates increase |
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Fed Funds Market
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Market in which depositories borrow and lend excess reserves overnight on an unsecured basis
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Fed cannot directly set the fed funds rate, but through monetary policy can have control over the rate - Fed funds target vs. Fed funds effective rate
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Increase (decrease) in reserve requirements -> decrease (increase) in excess reserves -> increase (decrease) in fed funds rate
Increase (decrease) in discount window rate -> decrease (increase) in excess reserves -> increase (decrease) in fed funds rate Purchase (sale) of securities -> increase (decrease) in excess reserves -> decrease (increase) in fed funds rate |
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fed fund rate
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interest rate that depositories charge on excess reserve lending
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